US Dollar on Verge of Major Move, Here are Our Preferred Pairs

- Forex volatility prices show that markets are on the verge of key shift

- Our focus remains on key US Dollar and Yen pairs

The US Dollar is on the verge of a major break higher, and these are the currency pairs we believe are most likely to see big moves.

Traders continue to buy the Greenback versus the Euro, Sterling, and other major counterparts as the Dow Jones FXCM Dollar Index trades into critical resistance. The key question becomes whether this is indeed the start of a much larger breakout. If it is, our focus shifts to Dollar trades against the Sterling and the commodity dollars.

Dollar Index Testing Critical Resistance as Volatility Rises

Source: FXCM Trading Station Desktop, Prepared by David Rodriguez.

Forex volatility prices indeed suggest we are at a potentially significant turning point in market conditions. Markets show that prices on long-dated volatility are setting a series of higher highs and higher lows. It’s obviously early still—particularly as volatility remains in a clear 6-year downtrend—yet the recent recovery off of record-lows makes this an important early warning sign.

Forex Volatility Prices Show Early Signs of Lasting Reversal

Data source: Bloomberg, DailyFX Calculations

We thus look to individual dollar pairs for potential trades, and a recent look at FX positioning suggests that the GBPUSD, AUDUSD, NZDUSD, and USDCAD may offer good opportunities to get long the US Dollar.

According to CFTC Commitment of Traders data, large speculators are heavily long the US Dollar versus the Euro and the Japanese Yen. EURUSD-short and USDJPY-long positions thus look a bit crowded, but the same data shows that traders are actually still net-short the Greenback versus the GBP, AUD, NZD, and CAD. All else remaining equal, this suggests that the Dollar has further room to run versus these currencies.

If this is indeed the start of a larger Dollar breakout, these become our favored trades. See the table below for full rundown on a per-currency pair basis and keep track of changing conditions with future e-mail updates via my distribution list.